What Harley-Davidson Learned From GM

Harley-Davidson has a rather storied history. Established in 1903, the company grew rapidly during the two world wars. Foreign competition hit the industry early, and by 1953 they were the last remaining major motorcycle manufacturer in the United States. Harley was bought by AMF in 1969, but by the late 1970’s they were on the block again thanks to a sharp reduction in sales resulting from poor quality levels. In 1981 thirteen Harley executives purchased the company back from AMF, but an overall reduction in the motorcycle market drove additional production cuts.

Harley-Davidson almost went bankrupt in 1985, but CEO Richard Teerlink convinced lenders to accept a restructuring plan that included the application of "Japanese management principles"… in effect the Toyota Production System or lean manufacturing. A temporary and reducing tariff on large imported motorcycles created a brief time window for the turnaround.

The plan worked. In 1987, one year before the 5-year temporary import tariff was scheduled to expire, Harley announced they no longer needed the tariff protection to compete. Between 1985 and 1987 the company had increased inventory turns from 5 to 20, reduced inventory by 75%, reduced scrap by 68%, increased productivity by 50%, and reduced manufacturing space requirements by 25%. Similar improvements were made to the marketing and product development sides of the company.

Employee involvement was critical to the process, which required a unique, trusting relationship with the union. The union viewed management as a partner and management tried to "in-source" as much work as possible to help improve worker employment potential. The workers responded by embracing and owning quality and continuous improvement.

Today Harley-Davidson is at a crossroads. Today’s Wall Street Journal describes how sales, income, and market share are increasing but workers are striking at their largest manufacturing complex in York, Pennsylvania and neither side is budging. The dispute is over a variety of wage and benefit issues, with management’s current contract proposal calling for a two-tier wage system to reduce the payscale of new hires, a 4% wage increase for each of the contract years, the requirement for workers or the union to contribute toward health insurance, and the company increasing the company 401(k) contribution match from 25% to 50%.

A 4% guaranteed wage increase, regardless of merit or performance, is unusually generous, as is a 50% 401(k) match. But the problem with the contract from the workers’ standpoint is the additional health care cost and the tiered wage system. The vast majority of us expect to contribute at least something to our health insurance plan. From a cost containment standpoint, not contributing anything as Harley employees currently do, creates the potential for system abuse leading to rapidly increasing costs.

Similarly a tiered wage system creates divisions between older and newer employees; in effect the company is trying to reduce wage creep and bring overall wages back in line through a step function. It’s not pretty, but accomplishing an overall wage adjustment is never easy. On one side you could argue that this is far less painful than a layoff to bring costs in line, but the lean manufacturers among us know that that option simply eliminates thousands of years of off-balance-sheet knowledge assets while demolishing a critical worker-management partnership. A true lean approach would be to grow markets and production while increasing productivity so the whole labor system remains in balance. Unfortunately growing markets is often dependent on uncontrollable economic factors.

But Harley-Davidson has learned something, albeit imperfectly, from what happened to GM and Ford. The pre-Japanese era during the 1960’s and 70’s was a booming period for Detroit. Foreign competition was minimal and perceived as very manageable. Therefore Detroit execs allowed lavish union contracts to be negotiated. Contracts that included no worker co-payment for health care costs, incredibly high hourly rates, guaranteed wages even when not working, strict stratification of duties that made flexibility impossible, and golden retirement benefits.

The chicken has come home to roost, and it’s no longer laying golden eggs. The costs associated with those benefits is one reason GM and its kin cannot compete with the likes of Toyota. But just one reason… the others being failed product design, poor quality, and a management so shallow that it believes that being number one in sales actually means something.

Many, especially in the media, blame the GM workers for their exorbitant benefits that created the costs that have made Detroit uncompetitive. I don’t. I blame their management. Management was also at the negotiating table. They didn’t look very far into the future to envision an environment with serious competitors. They didn’t care that their worker compensation structures and packages were skewing far above the norm. And therefore they couldn’t, and didn’t, try to explain the upcoming competitive reality to their workers. That management failure led to their current problems.

Harley-Davidson management is looking ahead. The Wall Street Journal article quotes Fred Gates, general manager of the York operations,

… the concessions were necessary now, despite the motorcycles maker’s currently strong performance, because we don’t want to find ourselves in 10 years in the same position that the Detroit auto industry is in now.

They can see a future with strong competitors, and they are trying to prepare the company now. That’s leadership. Sharing the cost of health care is common and should be a part of the contract. However there must be a more creative way to address base wage costs than to create a two tier structure. Harley-Davidson needs to sit down with their workers and union and describe their vision of a more competitive future, and reinvigorate the spirit of partnership that helped the company revive in the late 1980’s to attack the problems of the future. Together.

I disagree with the diagnosis offered in this post. Harley has treated their employees incredibly well for many years, which precipitated the fully-paid benefits and high wages. Now that the economy has become so tight, they must make adjustments. I know that for many recent years Harley has been leaning out operations as much as they can internally, affecting the “stuff” rather than the people. It appears to me that as a last resort, Harley needs to request these concessions from its unions. The Milwaukee workers accepted the proposal already, but York is fighting.

Did you know, also, that the non-union workers have had these benefits changes imposed on them this year? They don’t even have a choice. And as for wages with non-union workers, they have always been maintained with regard to the going-rate for the profession. As an interesting point, an engineer at Harley makes less than a production line worker. With the union structure, it is very difficult to make changes that are in line with the current economy, since the “contract” overrides that. I think the 4% guarantee and 401(k) at 50% are great demonstrations of Harley’s continuing value for their employees.

Unions everywhere need to understand that, yes, they are entitled to whatever they can get from their companies, but when that requires the company to nearly go under (which is what will happen to GM, I am afraid) then they need to examine that as destructive behavior. They are bargaining themselves out of a job, perhaps.